Greek Debt Crisis

The Greek Debt Crisis has been an omnipresent facet of the global financial scene for the past six or so years. Beginning in late 2008 after the housing market crash stateside and the following economic calamity, Greece found itself rapidly slipping out of solvency, and the crisis was born. Considering how much I’ve heard about this issue without knowing a single thing about it, I thought that an investigation and the dissemination of what I find would be valuable for both my readers and me.

The seeds were the crisis were planted in 2001 when Greece replaced the drachma with the euro. The euro was appreciating internationally, and everything looked splendid for the EU as they pushed for a uniform currency across the continent. In order to join the Eurozone, countries has to prove that they were “economically convergent” (somewhat similar) to the other Eurozone nations. Fundamentally, the Greek economy isn’t as strong as the Western European nations such as Germany or France, but the EU seemed to disregard this discrepancy.

In joining the Eurozone, Greece reportedly hid information about its true economic situation. According to CNN, it is a common consensus that Greece covered up its budget deficit that exceeded the economic convergence requirement of less than 3% of GDP. In fact, Greece reported a deficit of only 1.5% when the number was actually over 8%.

While Greece spent a few years in economic limbo, the global economy was rocked by the American housing crisis in 2007/08. The Greek economy was already faltering, struggling to make ends meet and cover their growing deficit, and the crash only made things that much harder. Other countries in the Eurozone could sense the struggle, and they, mistakenly so, had bound themselves to the sinking ship of Greece. They had no choice but to help.

Come 2010, Eurozone leaders agreed to bailout Greece to the tune of 110 billion euros, contingent on Greece improving taxation measures and trying to work towards eliminating the annual deficit. In comparison to Germany, one of the strongest economies in the Eurozone, Greece is far inferior when it comes to tax collection, as shown in the following graphic.

Image Courtesy of the Washington Post

To meet the conditions attached to the bailout, the Greek government was forced to lay off many workers, only deepening the spiral as the government struggled to generate revenue with fewer workers. In 2012, with the prior bailout having been ineffective, another bailout was issued, raising the total debt to 246 billion euros, over 130% of the GDP of Greece. However, for complex economic reasons, the situation continued to worsen as unemployment climbed to 30%. 

Image Courtesy of the Washington Post

As of June 2015, drowning in debt and battling rampant unemployment, the Greek economy was between a rock and a hard place. They could try and put up the money somehow to pay the debt, but, realistically, they needed debt relief. To this end, Greece actually defaulted on a loan repayment to the IMF, becoming the first advanced country to do so, according to ABC. This default capped the largest fall in GDP in an advanced economy since 1950: 25%.

Image Courtesy of RBS Economics

Last year, Greek exit from the Eurozone was a real possibility. In an attempt to abandon the forced austerity (decreased spending) from the EU, Greece was tempted to abandon the euro and return to the drachma. However, no one quite knew what would happen in this situation, seeing as now country has ever abandoned the euro, although now Great Britain is considering it too. After a third bailout deal in July 2013, Greece decided to adhere to the austerity measures and forget the notion of abandoning the euro.

Why, though, hasn’t Greece been able to pull itself out of this economic hell? An article from Fortune.com points out that the bailout was poorly implemented, not focusing “enough on Greece’s uniquely dysfunctional state apparatus.” Normally, government spending can solve the economic woes, but the forced austerity measures only deepened the difficulty, causing the aforementioned 25% economic shrinkage.

Currently, according to an article from the Huffington Post, Greece is continuing to struggle under the austerity measures and the influx of refugees. Public spending has to increase to accommodate the thousands of new refugees, and this increase in spending works directly in opposition with the principle of austerity, meaning that Greece must spend even less in other areas to compensate. With the debt still not paid off, refugees complicating the situation, and global market volatility, it is impossible to predict, and almost just as hard to understand, the nature of the Greek economy.